The question is simply whether, given volatility etc. the deal priced well for Citi. Then if Citi felt like it they could then hedge the deal by dynamically shorting Yahoo!--it's not like there was no borrow for Citi to get. What's dumb about Citi's approach here unless they decided to take a view on Yahoo! by not hedging the transaction while at the same time somehow knowing that Yahoo! would do so poorly as a stock over the next 7 years that it woudl lose over 40% of its value? As it is, they almost certainly hedged.

11:51 am August 26, 2011

Yippee wrote :

Thank goodness we have such deals as these. I'm sure the shareholders of Citi and Softbank are delighted that these two firms engage in such silly derivatives at such a scale. Just a casino at a big scale, not rocket science.

12:38 pm August 26, 2011

Hurricane wrote :

Citi lent against publicly traded stock. What's a bank supposed to do? Not make a loan against collateral so easily hedged where it didn’t have to judge the credit quality of anyone other than the borrower? It's the “rocket science” of SIV's with CDO's of CDO's etc. where no one paid attention to the underlying mortgages that did in Citi. This deal? Pretty straightforward. You assuming this is some "silly derivatives" transaction at "such a scale" when it’s an easily understood and evaluated loan that’s been part of corporate lending for decades. You have no basis for thinking shareholders of either company should be happy with it or unhappy with it.

Citi jus said that it hedged the amount with the same strategy - pledged the same nominal amount of Citi stocks to BOJ at the time, plus a 5% fee. Remember at that time, Citi stock was trading at the equivalent about $300 per share.

Editor Comment

1:27 pm August 26, 2011

Shira Ovide wrote :

Joker, where did you find out about the hedging transaction?

4:10 am September 28, 2011

VNTRADER wrote :

SOFTBANK America Inc. (“SBA”), a wholly-owned subsidiary of the Company, entered into a $1,136 million (¥120 billion) financing transaction, which consists of a variable share prepaid forward contract (the “collar transaction”) and a loan contract, with CITIBANK, N.A. This financing was completed through a joint venture, SOFTBANK Broadband Investments in which SBA holds a 98% stake.

The above-mentioned financing involves a variable share prepaid forward contract of 26 million shares of Yahoo! Inc.
owned by SBA and 530,612 shares of Yahoo! Inc. contributed into SOFTBANK Broadband Investments by another partner.

The shares of Yahoo! Inc. are pledged as collateral for the collar transaction and the loan agreement. The collar transaction includes a derivative to hedge the variability of cash flows associated with the future market price of Yahoo! Inc. stock. The Company guaranteed the loan in proportion to its holding percentage in SOFTBANK Broadband Investments.

Add a Comment

Error message

Name

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comment

About Deal Journal

Deal Journal is an up-to-the-minute take on the deals and deal makers that shape the landscape of Wall Street, including mergers and acquisitions, capital-raising, private equity and bankruptcy. In short, wherever money changes hands. Deal Journal is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s David Benoit is the lead writer, with contributions from other Journal reporters and editors. Send news items, comments and questions to deals@wsj.com.